U.K. Firms Plan to Alter Business Models Because of Brexit

Some 78 percent of British fund managers, including hedge fund, private equity and real estate managers, believe they will need to change their business models because of the U.K.’s decision to leave the European Union, according to a new survey.

State Street polled 111 institutional asset managers between March 29 and April 19 of this year for the latest installment of its quarterly Brexometer survey, released on Monday. Nearly 25 percent said Brexit would have a moderate impact on their business operating model, while 22.8 percent said it would have a slight impact. Less than 20 percent said it would have a significant or very significant impact.

Although the vast majority of fund managers acknowledge that Brexit will affect their business models to some degree, only 31 percent of those surveyed said they expected their firms to reduce their operational or organizational presence in the U.K. as a direct result of the U.K. government triggering Article 50.

Andrew Gray, head of the U.K. regional financial services practice for PwC, tells Institutional Investor that fund firms are beginning to realize they can’t wait until the conclusion of negotiations between the U.K. and the EU to make decisions about whether and how to change their U.K.-based operations.

“This is going to be a very long, complicated, and uncertain process,” says Gray. “That is increasingly becoming transparent to everyone. As firms have thought more about how long it is going to take them to adapt, they recognize they can’t wait for the outcome to start moving their business models.”

Brexit is also having an impact on how investors are positioning their portfolios, according to the State Street survey, with 18.8 percent of those surveyed saying that they plan to decrease their holdings in U.K. assets over the next six months.

Trevor Greetham, head of multiasset at Royal London Asset Management, says fluctuations in the value of the pound mean that U.K. equity returns can be seriously affected, given that the majority of blue-chip stocks listed on the FTSE 100 have significant exposure to foreign earnings.

“Brexit risks will increase following the general election [on June 8] as negotiations begin in earnest, and we wouldn’t rule out bouts of sterling weakness boosting domestic equity prices,” says Greetham. “Ironically, signs that EU negotiations were going well and the economy holding up would mean a stronger pound and poorer returns for investors in the U.K.”

Patrick Connolly, head of communications for investment adviser Chase de Vere, says it should be noted that most fund managers aren’t planning to change their U.K. exposure simply as a result of Britain leaving the EU.

“Nobody yet knows what impact it will have and who will be the winners and losers,” he says. “Investment assets have performed very well in recent years and, as a result, many investors will be looking to reduce risks and crystallize gains.”

Despite some concerns about the impact that sterling’s strength will have on company returns, 34.7 percent of those surveyed have a positive outlook on the prospects for global economic growth over the next three to five years. A further 54 percent were neutral on the outlook.

“The long-awaited post-Brexit vote slowdown is showing tentative signs of appearing in the data, but long-term investors remain optimistic,” writes Michael Metcalfe, head of global macro strategy at State Street Global Markets, in a statement released alongside the survey. “The majority of our respondents, 64 percent, still have no plans to reduce their holdings of U.K. assets in the next six months.”